Berkeley Professor of Public Policy Robert Reich became famous for a book called “The Next American Frontier” where he favored a kind of American Industrial Policy while at the Kennedy School of Government at Harvard. That book, and “American Industry in International Competition” and “The New Industrial State” by John Kenneth Galbraith, plus a healthy practice of system dynamics modeling, helped to form my current economic view.
Currently, Reich serves as what he describes as an “informal advisor” to President-Elect Barack Obama. In his blog, which I’d wish he’d break up into subject portions for linking, Reich points to the big “C” – Consumers — as being at the heart of the economic problem. He writes:
The real problem is on the demand side of the economy.
Consumers won’t or can’t borrow because they’re at the end of their ropes. Their incomes are dropping (one of the most sobering statistics in Friday’s jobs report was the continued erosion of real median earnings), they’re deeply in debt, and they’re afraid of losing their jobs.
Introductory economic courses explain that aggregate demand is made up of four things, expressed as C+I+G+exports. C is consumers. Consumers are cutting back on everything other than necessities. Because their spending accounts for 70 percent of the nation’s economic activity and is the flywheel for the rest of the economy, the precipitous drop in consumer spending is causing the rest of the economy to shut down.
I is investment. Absent consumer spending, businesses are not going to invest.
Exports won’t help much because the of the rest of the world is sliding into deep recession, too. (And as foreigners — as well as Americans — put their savings in dollars for safe keeping, the value of the dollar will likely continue to rise relative to other currencies. That, in turn, makes everything we might sell to the rest of the world more expensive.)
That leaves G, which, of course, is government. Government is the spender of last resort. Government spending lifted America out of the Great Depression. It may be the only instrument we have for lifting America out of the Mini Depression. Even Fed Chair Ben Bernanke is now calling for a sizable government stimulus. He knows that monetary policy won’t work if there’s inadequate demand.
So the crucial questions become (1) how much will the government have to spend to get the economy back on track? and (2) what sort of spending will have the biggest impact on jobs and incomes?
The answer to the first question is “a lot.” Given the magnitude of the mess and the amount of underutilized capacity in the economy– people who are or will soon be unemployed, those who are underemployed, factories shuttered, offices empty, trucks and containers idled — government may have to spend $600 or $700 billion next year to reverse the downward cycle we’re in.
The solution, in my view, is to give the American Taxpayer a $4,200 per-person check, each. Then form a plan to subsidize labor costs in selected export industries and rather than pick the firms, let them fill out an online application for assistance and make it so everyone knows who’s applying for it and who got it. Finally, the massive infrastruture reinvestment program is part of this, too. But the idea is that the check will help American workers during this time of economic adjustment and even reach those — like Joe The Plumber — who can’t file for unemployment insurance.